Middle East physical oil prices are falling while Brent crude soars to six-month highs

Physical prices of some Middle East crudes sold outside the Persian Gulf reportedly have dropped in recent days, as more cargoes are pushed through the Strait of Hormuz in ship-to-ship transfers offshore Oman and producers offer competitive prices to Asian buyers.

Among examples of the shift, a cargo of Iraqi Basrah Medium crude was sold at a discount of nearly $10/bbl to the physical Dubai benchmark on a ship-to-ship transfer basis in the Gulf of Oman, after the crude grade was offered at near parity to Dubai a month ago, traders told Bloomberg.

The premium of Oman crude over Dubai, the leading Middle East measure of market strength, fell this week to the lowest level since the end of July, according to OilPrice.com, after the differential had surged to as high as $65/bbl in March.

The higher availability is depressing the prices of various physical crude grades from the Middle East, which come with assurances of an ability to get oil out of the Gulf, and are in contrast with trends in global benchmark oil futures, with front-month Brent contracts rising for five consecutive weeks and settling at six-month highs on Friday.

"The move higher in oil futures is not fundamentally driven at the moment; instead the market is trading supply risks," ING's head of commodities strategy Warren Patterson said in a note.

"While Middle East flows are holding up well for now, the real concern for the market is how sustainable these would be with renewed attacks, which helps to explain the divergence between the paper and physical market," Patterson said.

Meanwhile, a tanker carrying Russian diesel is heading to the U.S., Reuters reported Friday, following the agreement reached this month between the two countries.

The Malta-flagged medium-sized tanker Agioi Fanendes ​was loaded with 40K metric tons of ultra-low sulfur diesel in the Russian Baltic port of ​Primorsk on October 22 and is expected to arrive in the U.S. on November 7, according to the report.

The cargo will be the first ​imported by the U.S. since former President Biden announced a ban on U.S. imports ​of Russian oil and petroleum products in 2022.

Crude oil futures rose Friday, closing out the week with strong gains on fears of escalating conflict in the Middle East driven by Houthi attacks on Saudi Arabia and increasing talk about renewed U.S. military strikes against Iran.

"Crude oil prices are on the rise as the market rebuilds geopolitical risk premium amid escalatory rhetoric from the U.S.-Israel and Iran, raising fears of renewed and potentially even more intense back-and-forth strikes," Mike Castle of StoneX said in a note.

"The market is concerned about the continued Iranian attacks on tankers that we've seen increase over the last week," according to Lipow Oil Associates president Andrew Lipow. "While there has been an increase in oil transiting out of the Strait of Hormuz, that could change at any minute."

On Friday, front-month Nymex crude (CL1:COM) for December delivery rallied 3.8% to $103.27 and front-month Brent crude (CO1:COM) for December delivery surged 3.1% to $116.72/bbl, its highest settlement value since April 29.

Front-month Nymex ULSD (HO1:COM) for November delivery gained 1% on Friday to $4.9482/gal, while front-month Nymex RBOB November gasoline (XB1:COM) added 1.1% to $3.2116/gal.

For the full week, Nymex jumped 4.3%, Brent crude climbed 6.2%, its fifth consecutive weekly gain, and ULSD rose 1.7%, its fourth straight weekly gain, but RBOB gasoline slipped 0.7%.

U.S. natural gas futures (NG1:COM) extended the week's steep losses as mild weather for the time of year combined with rising production; the front-month Nymex November contract fell 5.6% on Friday to $2.640/MMBtu, concluding the week's 15.3% plunge.

Energy stocks, as represented by the State Street Energy Select Sector SPDR ETF (XLE), rose 1.6% this week.

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